Having a baby means it's even more important to make sure you're financially secure.
Update Your Budget
According to the U.S. Department of Agriculture, it will cost a middle-income couple slightly more than $233,610 to raise a child born in 2015 to the age of 18—a total that doesn’t even include the cost of sending a kid to college. That comes down to an average of $12,350 to $14,000 a year.
Living as a couple, you probably have a finely-tuned budget. With the exception of life’s unexpected moments, you probably have a good grasp on the money coming in and going out each month. But it goes without saying, a baby is going to add a few more expenses to your monthly total. You’ll have the upfront costs of purchasing necessities that include a crib, car seat, stroller, bottles, and clothes, followed by the on-going costs of diapers, formula, diapers, and more diapers!
Beyond the basics, here are additional costs to address when you re-work your budget for a family of three (or four.) (Do twins run in your family??!)
Life insurance takes on a more important role when you’re starting a family than when you were single or a couple. Your life insurance coverage should be enough to cover funeral expenses, the loss of your income (a good rule of thumb: cover 10x your annual gross salary), and any outstanding debt, including your mortgage, car payments, and credit card debt. You also may consider additional coverage to cover the expense of your children’s continuing education.
The cost of childcare can vary greatly depending on where you live, the type of care you’re looking for (at-home care, daycare center, or a nanny), the age of your child, the number of children in care, and the number of hours of care you’ll need. Most parents agree, childcare is the largest cost that comes along with a new baby.
Baby Center breaks down average childcare costs that you can use as a starting point for working into your new budget:
- Daycare center costs for infants: $972 a month
- Home daycare costs for infants: $646 a month
- Nanny care costs for infants: $2,167 to $3,033 a month
It’s recommended that your emergency savings be enough to cover at least three to six months of expenses. With your new arrival, this total will undoubtedly increase. Updating your budget will give you a clearer picture of what your emergency savings should look like.
Sign Up For Health Insurance Coverage
Once your bundle of joy arrives, you have 30 days to add him or her to your health insurance plan (60 days if enrolling in Marketplace coverage). When you apply within this timeframe, coverage for your child is retroactive to the day of his/her birth.
If both you and your spouse have insurance coverage, you’ll need to do your research to determine which has the best dependent coverage. Since you may find yourself in a sleepless fog and a flurry of visitors in the month following birth, take the time now to determine which plan you’ll add your child to.
Look into the following costs and areas of coverage to help you decide which health insurance plan is best:
- How much will your premiums increase when adding a dependent?
- How does adding individuals to your plan affect your deductibles?
- What co-pays will you be responsible for?
- Which plan offers the best coverage for well-baby visits, sick visits, and immunizations?
You May Be Eligible for an HSA
With a new member of your family, you may also want to consider opening a Health Savings Account (HSA). You’re eligible to open an HSA if you’re enrolled in a high-deductible health insurance plan. A high-deductible plan is one that has an out-of-pocket of $6,550 for individuals and $13,100 for families and a minimum deductible of $1,300 for individuals and $2,600 for families.
You can determine how much to contribute to your HSA each year, but you cannot exceed these maximums:
- $3,400 for individuals
- $6,700 for families
- Adults over 55 can contribute an additional $1,000
The money you contribute is pre-tax, the money grows tax-free, and withdrawals from your account are not taxed. The money in your account should be used to cover medical expenses such as deductibles and copays.
Research Tax Benefits
Not only do you get to bring home a snuggly little bundle that you have the privilege of raising, a new baby brings other advantages. The biggest advantage to your wallet will be the tax breaks! If your child was born any time up until 11:59 PM on December 31, you can claim him or her on your current year’s taxes. Your first step will be applying for a Social Security number for your baby, as this will be necessary to receive any tax exemptions or credits.
Your Tax Withholdings
A new dependent means you can reassess your income tax withholdings. You can file an updated W-4 form with your employer within 10 days of the birth of your baby, adding your child as a personal allowance. When you claim additional allowances, less income tax is deducted from your salary.
The IRS allows a personal tax exemption of $4,050 to cover basic living expenses. An exemption means that the IRS will not tax that amount of your earned income. Married couples can take two exemptions. A new baby allows you to take an additional exemption, called a dependent exemption. You’ll continue to receive a tax exemption for each child you have until they reach 19-years old (or 24-years old if your child is a full-time student.)
Child Tax Credit
A new baby also provides to you with a $1,000 tax credit. Unlike the dependent exemption above, which decreases your taxable income, the one-time tax credit reduces your tax bill by $1,000. This tax credit does phase-out for individuals earning a higher income, and no credit is available once your income rises above $110,000 on joint filings or $75,000 for single filing.
When you adopt a child, you are eligible for additional tax credits to cover the expenses of the adoption process including adoption fees, legal fees, and travel. The tax credit can be worth as much as $13,460.
Child & Dependent Care Credit
If you pay for childcare, allowing you and your spouse to work or further your education, you can earn a tax credit between 20-35% of dependent care expenses. The amount of your tax credit is determined based on your income, with those with earning less than $15,000 qualifying for the full 35% credit. From there your credit amount drops 1% for every additional $2,000 you earn. Anyone earning over $43,000 will qualify for a 20% credit. You are eligible for this tax credit until your child is 13 years old.
Dependent Care Account
This is an employee benefit that many companies offer. If both parents work or attend school, your family can put pre-tax dollars, up to $5,000 if filing taxes jointly or $2,500 if filed separately, into an account to pay for childcare expenses. You’ll need to submit claims to request reimbursement for your childcare expenses, and the money can even be used to cover the cost of before- and after-school care and summer day camps.
Write A Will
Couples often get serious about putting a formal will in place when they are preparing for a baby. Most importantly for new parents, a formal will allows you to name a legal guardian for your child in case you and spouse both pass away.
A will also sets up a testamentary trust for the assets your children will inherit and names a trustee to manage the trust until your children reach the age (ex: 18, 21, or 25) or specific life milestone (ex: graduating college) you designate. The trustee does not have to be the same person as your chosen guardian. In fact, it may be smart to choose separate individuals to serve as guardian and trustee to create more“checks and balances.”
At the same time you are crafting a will, you may also want to update the beneficiary information on your life insurance policy or retirement accounts. While you can still list your spouse as the primary beneficiary, you can add your child (or the testamentary trust in your child’s name) as a secondary beneficiary.